Monetary and allied questions will form the subject of the second volume of this series.  It must not be supposed that our general laws have no bearing on them.  On the contrary, Law I, which all this time has remained serene and undisturbed by the occasional discomfitures of Law II, is the gateway through which all questions of currency, banking and the foreign exchanges should be approached.  It is well to note, as an inexorable corollary of Law I, that prices can rise only if demand exceeds supply, and fall only if supply exceeds demand; and hence that it is only through the agency of changes in the demand for and supply of commodities and services that an inflation or deflation of the currency can influence the price level.  Further, since a condition of things in which supply generally exceeds demand spells what we know and fear as a trade depression, it may be well to note at once that falling prices and unemployment are inseparable bedfellows.  For we are far too apt to shut our eyes to these unpleasant truths.  But we cannot pursue them further here; and in the remainder of this volume we shall not be concerned (except, perhaps, incidentally) with questions affecting the general level of prices or of purchasing power; but rather with the relation which the price of one commodity bears to that of another, with the rate of interest (which being a rate per cent is not essentially dependent on the price level), with “real” wages (as distinct from money wages) and the like.

Sec.7. The Trade Cycle.  But our reference to trade depressions suggests a final comment on Law II.  One small qualification was embodied in our original statement of it, namely the words “sooner or later.”  A rise in price may not check the demand immediately (even if the printing presses are standing idle in the Treasuries); it may actually stimulate it for a time.  For people may fear that the price will rise further still, and hasten to buy what they must buy before very long.  Sellers may share the same opinion, and be reluctant on their side to part.  When prices are falling the roles are reversed, and we are likely to see the sellers tumbling over one another in a frantic eagerness to sell, the buyers wary and aloof.  Sooner or later, indeed, these tendencies must dissolve and disappear; but they may persist for a longer period than might seem probable at first.  For the raw material of one trade is, as we say, the finished product of another.  The demand for one thing gives rise to a demand for other things, for the labor with which to make them, and so on in an expanding circle.  A sympathy, subtle and intense, unites the business world, and a wave of depression or animation arising in any quarter may spread itself far and wide, heightened by the gusts of human hope and fear, and continue long before its influence is spent.